Paulson Supports Strong Dollar as New Currency Lows are Reached

Some jobs are just impossible. US Treasury Secretary Henry Paulson, for example, was speaking at a meeting in New Delhi, the Fortune Global Forum, where he said, “I’m strongly committed to a strong dollar.” Then, he added, that open markets should set currency rates based on economic fundamentals. One is surprised he wasn’t laughed of stage.

When a currency is “strong,” that means one can exchange it for a large amount of other currencies. When it is “weak,” it means one gets very little back in the same kind of exchange. Contrary to conventional wisdom, though, a weak currency may be just want a country needs, and a strong currency could be a screaming disaster. A nation that relies on exports (for example, Japan) can’t make it with a strong currency. Its products are too expensive for its overseas customers.

So, Secretary Paulson’s bias toward a strong currency is merely a government official trying to talk up the currency. Naturally, if he had said, “I favor a weak dollar,” the markets would have provided such in short order. The reasons for that lie in the fundamentals of the US economy, upon which Mr. Paulson thinks the markets should base their financial decisions.

The US has an enormous trade deficit with the rest of the world. That means billions of US dollars leave the US each and every month while all sorts of goods flow into the US. Non-Americans like to have US dollars, and so long as they are content to collect pictures of dead presidents, this arrangement will work. When they think they have enough of those pictures, though, they will either want something else, or because an increasing supply lowers the value of something, they might want even more US dollars so they can buy other things with them. The result in either case is a dropping US exchange rate.

For the record, Peter Garnham of the Financial Times wrote yesterday, “On Monday, it [the US dollar] dropped to a record low against the euro, a 47-year low against the Canadian dollar and its weakest level in 23 years against the Australian dollar. Meanwhile, the dollar index, which tracks its value against a basket of six major currencies, fell to its lowest level for 34 years.” Either Mr. Paulson can favor a strong US dollar or he can favor open markets setting rates on the basis of fundamentals. He can’t favor both as they are mutually exclusive.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Home